Buy or Sell S&P500?

Yesterday, S&P500 punctured through the 150-day MA, and touched the 200-day MA lines.   Is this a Buy or Sell signal?

How has the S&P500 performed in the past, when it has touched the 150-day and 200-day MA lines?

This chart is just the past year charts, but I encourage you to do your own study over a much longer period.

On the Main box, I showed 3 things:
1. The 50, 100, 150, 200-day MA.
2. The Linear Regression Channel.
3. The Fibonacci Expansion levels.

General Price commentaries
After the big dip in October 2014, S&P500 index continues to edge higher in December, and continues to make higher highs in Feb and May although the increase is getting smaller.  Since the start of this year, S&P500 seems to be trading in a sideways range.  Just a cursory glance shows that the Bull needs to rest, before making its next move.

The 50, 100, 150, 200-day Moving Averages are getting closer and closer to one another over time (compare today's gaps vs a year ago), suggesting sideways ranges over the past few months.  If this pattern continues, soon, prices will no longer respect the Moving Averages ...

Linear Regression Channel (LRC)
This is one of my favourite ad hoc tool.  The idea is to filter out noises, and just highlight movements outside this channel.  As you can see from above, whenever the price moves near the borders/outside the Channel, it seems to give a good contrarian signal for the trader to act.  It doesn't occurs often, in fact it occurs quite rarely, improving the strength of the signal.

The problem with the LRC is that it doesn't tell you how far the fall can be, when it exceeds the bottom of the channel.  For example, in October 2014, it fell outside this channel for 1-2 weeks, before getting back into the rising channel.   The rising channel validates the longer term Bull trend, together with the slope of the 200-day Moving Average which is also rising.

However, it can be seen that whenever prices fall below the LRC, this would have been a very profitable Buy Signal.  If you had bought every time prices falls below the LRC, and held until prices went back into the Channel, you would appear to have a 100% win rate so far, as long as the Market remains in a Bull Market mode.   Of course, how long the Trader suffers "pain" is uncertain - that is decided by the Market.

Other Indicators
MACD is gradually narrowing over time, suggesting a sideways action in the past - this is actually a potentially dangerous signal if continues over time, as it suggests that there is a potential for a breakout, whether up or down.  We don't know, but yesterday price action suggests serious downside move.

RSI(10) is nearly 30, suggesting an oversold condition.

Slow Stochastics is not yet oversold.

Implied Volatility spiked up, suggesting serious fear.   As Implied Volatility spikes don't last forever, this is also an indication that we could be near the climax of the selling, either this week or at most 2 weeks from now (unless markets crashes which is extremely unlikely scenario).

Support & Resistance
Unfortunately, the Bears will need to do a hell of a lot of work to invalidate this Bull Market.   For me, even if SPX invalidates the December 2014 low, as long as it is still above the October 2014 low, this is still very likely to be a Bull Market.  

Notice that the October 2014 Support sits on the 127.2% Fibonacci Expansion, which itself is an important line.   This line is drawn from the 2007 high down to 2009 low, which marks a very important period in the S&P500 last 2 decade history.

More importantly, the 161.8% Fibonacci Expansion sits at 2138, 4 points higher than the High of 2134 so far.   Normally, first attempts to break a strong resistance like 2138 should fail (meaning it could break it, but eventually, it will fall back below 2138).   This observation can give to trade ideas later on the short side.

For this Bull to be declared Dead, I would need to see SPX violates 1823, or the 200-day MA slope downwards, whichever happens first.   As SPX is 2057, it is still 230+ points or more than 11% away, before the Bull Market would be considered Half-Dead / Dead ...

Until the Bull is Truly Dead, we continue to Buy the Dip
The above is just a sample of possible view to analyse the S&P500.
In fact, you could come to similar conclusions using many other Technical Analysis tools.
The specific tool you use doesn't really matter, as long as you know how to use it well under 10 to 20 years of varying market conditions.


How to Capitalize on this?

1. Look to buy outside the Channel, and sell when it goes back inside the Channel.
Where exactly to buy isn't too critical, as long as it is below the Channel.  The 200-day MA is as good as any.  In general, if the Bull is still intact, lower is better of course.
Where exactly to sell isn't too critical, as long as it is inside the rising Channel.   The 50-day MA is as good a target as any, or the latest Pivot Highs downtrend line resistance.  Of course, we prefer as high as possible, but markets are not always that accommodative.
Of course, we are not looking for extremely small profit, but as much profit as possible without compromising the very high (100%) win rate.

2. The key is holding power, but with Limited Risk, not unlimited Risk
As we don't know when it will go back into the Rising Channel, we need "holding power".

Unfortunately, the problem with owning ETFs is that it presents unlimited Risk.   Markets can do anything, and what we don't want to see if owning a lot of ETF only to see SPX breaks below 1823.   Then, the pain is huge, as this can be up to 12% fall.   If one is 100% invested in SPY, this is at least 12% loss in capital, with no end of the pain in sight.   More pain is possible if the Bull is Dead and the market starts to become a Bear.

Worse of course if you invested in UPRO with 3X leverage.  Instead of 12% loss, that would be 36% loss.  With instruments like this you will need to apply Stop Loss, but this reduces the win rate from 100% down to something significantly lower - it also open yourself to risk of being stopped out unnecessarily.

3. Consider buying a simple Call Option with limited Risk to avoid getting stopped out unnecessarily.
I don't normally trade with a simple Call Option, but this is one situation where simplicity is not actually that bad, given the extreme move outside the Channel.

One critical benefit of owning a simple call option which you can't get if you own ETF, CFD, Futures is predefined Risk.   The most you can ever lose is the entire Option Premiums.  Even if the Market falls by another 10%, 20%, etc.   The trade-off of course is Theta decay - the stock needs to make a move far enough to offset Theta decay before you see the gain.   Given the extreme move (falling outside the channel, and the short term period expected to recover), this is not expected to be a problem.

This of course presumes that you have selected a "safer" Option Strike and Expiry date.  Something like 2-3 months to expiry, and a little bit "out-the-money" (OTM) represents a good compromise between higher % reward and cheaper premium (lower risk).

4. Trade consistently, risking the same % of capital each time, never exceeding 3%-5% capital.
The reason is because Market can do Anything.  The last thing we want to do is to bet the entire farm, only to find Market has turned to become a Bear.

The goal is to win consistently, so that over the long run, we will have winners.

When we have a system with a very high win rate (here, it is still 100% in a Bull Market), we don't need to risk the farm.   Even if the RRR = 1 or 0.5 times, the expectancy should still be very positive, due to the extremely high win rate.   However, what could cause the expectancy to become negative is to be stopped out unnecessarily.

Risks

This is not an endeavour to be applied one time only.  The goal is to reduce risk by taking all eligible signals over time.  The risk is reduced substantially when the number of eligible trades increases over time.

And of course, Markets can do Anything.  It could well be that if you have not bought the Dip before, then, your very next time to do so saw the Market turns from a Bull to a Bear - if so, accept the loss and move on.

Conclusion

The above is not meant to be conclusive, but only to illustrate a system that provides signals rarely, but so far, has a 100% win rate in a Bull market (until the Bull turns into a Bear).

For me, until the Bull conclusively turns into a Bear, every dip, as long as the 200-day Moving Average continues to slope upwards, remains a Buy the Dip near / below the bottom of that ever changing Linear Regression Channel.

Index vs Individual Stocks

Six charts to compare the S&P500 index vs 6 individual stocks that you may be familiar with (XOM, AAPL, FB, KO, NFLX, SKWS), over the past 12 months.  Do you notice the similarities and differences between the S&P500 Index vs Individual Stocks?

 

 

Here are just 7 of the more basic and fundamental differences:

1. XOM (an individual stock) can keep trending down for 12 months and lose 18%, when the S&P500 can bop up and down to eek out a small 4.27% over the same period.

Conclusion:  Individual stock (even popular names) can trend down longer than you expect.

2. SKWS (an individual stock) can keep trending up for 12 months and gain 114%, S&P500 with its +4.27% appears flat in comparison.

Conclusion:  Individual stock can trend up longer than you expect.

3. NFLX (an individual stock) can fall hugely and rise hugely over a 12 month period compared to S&P500.

Conclusion:  Individual stock (even popular names) can fall and rise a lot more than the S&P500 Index.

4. Discontinuities from Opening Gaps.   Not shown here, but individual stocks are more prone to opening gaps (up or down), and these opening gaps are largely unpredictable in terms of 1. Direction, 2. Quantum, 3. Timing.   Indices tend to have a lot less discontinuities.

5. Earnings, Company Guidance, News, Announcements, Dividends, Stock Splits, Merger & Acquisitions, New Product Launches, Key Management changes, etc. can impact an individual stock price very significantly.  These tend to have a much smaller/negligible impact on the S&P500 index.

6. Higher volatility (greater unpredictability) from individual stocks.  Even the "boring" KO (Coca Cola) stock is more volatile than the S&P500 Index.

7. The S&P500 index is more "choppy" and trends less than individual stocks.  After rising for several days, it tend to pulls back, and after falling for several days, it tends to recover.  Whereas individual stocks can suddenly turn into a strong trend that last longer and goes further than one expects.

Does this mean that trading Indices like S&P500 is "boring" and "low returns" compared to individual stocks?  

No.  Most traders that trades the S&P500 index trades leveraged products, such as Futures, Options and other leveraged products on S&P500.  The best traders like Karen the Super trader who only trades SPX (S&P500) tend to earn more than the best stock traders due to the leverage. 

The key is a positive expectancy trading system, the number of trading opportunities per month, position sizing/Money Management and the individual Trader Psychology.    It is very rarely about "which stock" and "what price" (meaning there can be many different instruments at many different prices that creates a positive and negative expectancy system).

The Miracle of Compound Interest

Apparently, Albert Einstein once called compound interest “the greatest mathematical discovery of all time”.  I am sure you will have heard of this term.   The question is why and how powerful is it over the long term?

Take a look at the table below:

This table shows the accumulation of a starting initial capital of $10,000 over each month, for the next 120 months (10 years). 

Column 1: 0.25% per month interest rate

• 0.25% per month is equal to 3.04% per annum.
• Almost similar to our F.D. rate in Malaysia.
• $10,000 capital grows to $10,304 after 12 months.
• After 10 years, it grows to $13,494, or 35% returns after 10 years.
• Unfortunately, this doesn't keep pace with "real life" inflation (not the government statistics).
• When the interest rate is small, compound interest has little impact, and requires a much longer period to work miracles.

Column 2: 0.75% per month interest rate

• 0.75% per month is equal to 9.38% per annum.
• After 10 years, $10,000 grows to $24,514, or 145% returns.
• In Malaysia, there are very few passive investments for the lay person to earn this kind of returns over the next 10 years.  An example may be a property investment in a high demand area with good long term capital appreciation coupled with good rental income, after subtracting associated costs and expenses.   However, this type of property will cost much more than US$10,000.   It is not easy to earn 145% returns over the next 10 years today.
• In the U.S., this type of returns are available for example, to passive U.S. indexed stock investors or Dividend Growth Investors who are in the game for the very long term.  For example, the returns on U.S. indices including dividends after taxes are typically around this 9%-10% per annum returns over the past 50 years.
• Note 0.75% = 3 x 0.25%.  However, 145% >> 3 x 35% (= 105%).   The excess returns after 10 years of 40% (= 145% - 105%) is due to the miracle of compound interest.
• In short, higher interest rate and longer investment time increases the miracle of compound interest.

Columns 3 to 5: 1.5% to 2.5% per month interest rate

• This is the "Warren Buffett" / Super Investor type of returns consistently over the past 5 to 6 decades.   In his early years, it was closer to 2.5% per month (or 34% annual returns), in his later years, it gradually reduced to 2% and 1.5% per month as his capital grew bigger and bigger causing a slight drag over time.  Still, Warren Buffet is truly a great living example of how Compound Interest has allowed him to accumulate massive wealth over long periods of time.
• In his early years and most of his career, Warren Buffett did not employ leverage.  However, traders who employs leverage can enhance on this returns.   Hence, this area of returns (1.5% to 2.5% per month, or 19.6% to 34.5% per annum returns) is usually the Minimum target returns for the very few successful long term traders that employs leverage, either from Margins, high leverage instruments (like Options, Futures, CFD, Forex, etc.), High Turnover (instead of passive investment), or other forms of leverage.
• Note that at 2.5% per month returns, a starting $10,000 investment will grow to $193,581 or 1,836% after 10 years.   Whilst 2.5% per month is 10 times F.D. rate of 0.25% per month, the impact after 10 years of 1,836% is much larger than 10 times 34%.  This is the power of compound interest.   Extend that beyond 10 years (like 20, 30, 50 years) and you'll discover an even greater power.  This is how Warren Buffett became the world's richest men over decades.   By investing in a safe and predictable instruments that generates consistent 1.5% to 2.5% per month (equivalent, in Intrinsic Values), over decades.

Columns 5 to 8:  3% to 5% per month interest rate

• These columns may appear like a "dream" for most investors and traders. 
• Yet, in any one month, many investors and traders are able to achieve a one-time 5% per month returns. 
• However, the critical difference is sustainability.   When we extend the period to 12 months, 24 months, 36 months, 60 months and 120 months, 99.9% of investors and traders drops off very, very quickly  
• Nearly all traders and investors are unable to sustain this type of returns over 10 year periods.   The few that do are the Market Wizards, the Super traders in the world that eventually become billionaires.
• However, when one's capital is still in the small stage (e.g. US$10,000 and a small portion of one's net worth), it is possible to adopt a more aggressive trading strategy that aims to achieve this type of returns relatively safely.
• If you are successful to achieve 5% per month returns, you could turn $10,000 into $17,959 or achieve nearly 80% returns per annum.   Compound that for 10 years consistently, and your $10,000 can turn into $3.5 million, or nearly 350 times, or 35,000%!  Contrast the 34% return from F.D. after 10 years.  Isn't this a miracle, transforming $10,000 into $3.5 million to transform your life?
• Whilst 1,000 readers reading this may understand the mathematics, unfortunately, there are extremely few (less than a handful) real life traders who are able to achieve this consistently over a 10 year period.   I don't know yet of any Market Masters in this region who have obtained a 10 year audited real life account that showed this type of returns, but many do show great progress to meet and exceed this target over a much shorter period than 10 years.

Summary and Conclusion
If one is serious to grow his/her net worth over the long term, here are some takeaways:

1. Start Now.

• The more time you have, the greater the miracle.
• Start today, because every day that passes is an opportunity lost.
• Start when you baby is born, or even better, before the baby is born, so that s/he has a lifetime to capitalize on this miracle.  Grandparents may consider helping their grandchildren.
• Like Warren Buffett and every one else, we all have the same 12 months in a year.   Don't squander each month.  Make each month counts.

2. Learn to improve the rate of returns.

• If you have the habit of putting monies in a savings account that earns extremely low interest, start by moving them to F.D. for monies you don't expect to touch immediately.   The difference between 1% and 3% makes a large difference over your lifetime - much more than you can imagine.
• If you have been stocking huge amounts of monies in F.D.s, consider paying off your debts and mortgages first.  If you are debt free, consider owning a second investment property or other assets that appreciates in value over time that has a long term proven returns exceeding F.D.s. 
• Again, even 1% difference in yields, if they are reliably proven to be superior over the long term, makes huge differences to your future net worth.

3. Try to avoid negative returns.

• Someone who achieves 2.5% per month consistently will end up doing better than another trader that achieves +10% in Month 1, -5% in Month 2, +10% in Month 3, -5% in Month 4, and so on.   Surprised?   The 2.5% consistent achiever will grow $10,000 into $13,449.  Whereas someone who achieves +10%, -5%, +10%, -5%, etc. will only grow $10,000 into $13,022, or 4% less.  
• This is because negative 5% returns requires more than +5% returns to break even.
• It is always better to avoid losses, especially large losses, as it requires more than the same magnitude of returns to break even.

4. Be patient and stay disciplined to stay the course

• Most professionals are aware of compound interest and the miracles.   Much have been written about it.  Yet, so few actually practiced it year in year out over very long periods of time.   Majority are still in debts after decades and not yet financially free.  Why is this?
• Perhaps it starts with the real life observation that "knowledge alone is not enough to accumulate wealth over the long term".  If knowledge alone is enough, the world's richest would be the smartest people on earth, and yet, we know this is not necessarily true.
• Knowledge + Action helps to get a good, start, but also doesn't appear enough.  We all know people who has the knowledge and has started to act on it, but somehow, life has a way of moving them "off course", and they are not successful after decades.
• Knowledge + Action to Start + Action to Stay Disciplined and stay on the course seems to be a better way.   The question is how to stay disciplined?  Every day we have life priorities.  Compound interest is a very important topic, but is usually not urgent once we have started to take action.  A minimum level of discipline, persistence, commitment is usually required.  It doesn't guarantee success, but without it, it assures failure.
• There are many ways to stay disciplined.  For example:
• Seek like-minded friends and family with similar goals to constantly remind each other the importance of staying disciplined. 
• Read articles, books, blogs, on similar themes from time to time to stay disciplined. 
• Post reminders (like the table above) on your private wall at home to remind you regularly of the power of compound interest. 
• Tabulate your Net Worth each month or each quarter to just see the progress, to remind you how you are doing. 
• We all need some reminders some times to help us stay the course, when we have the knowledge and have started to take actions.

5. Compound Interest rewards you exponentially more the longer you stay true to the course

• Look at the 2.5% per month column.
• After 5 years, this turned $10,000 into $43,998, or nearly $34k gain.
• The next 5 years turned $43,998 into $193,581, or nearly $150k gain!  $150k gain is much, much bigger than the first 5 years gain of $34k gain.
• Just imagine how large the following 5 years gain will be like!  Do the maths yourself, and it will blow your mind away.

I sincerely hope you are successful in engaging the power of compound interest to transform your life over the very long term.   Let's plant the seed and consistently grow the tree, to create miracles in our lives in the future!

Novice Guide: How to Open (and Use) a TOS Account

As you will know, TOS stands for ThinkOrSwim. 

Very Powerful Platform to trade US stocks
It is a very powerful platform to trade US stocks and much more.   I personally trade with this platform.  So does Karen the Supertrader, who owns over US$200 million account and apparently she uses only TOS platform as well.  At least thousands of new traders start with the same platform too every year! 

Everyone has one
The great thing about the TOS platform is that it is very scalable, from the extremely small account, to the largest retail account in the planet.   You can trade this platform alone for the rest of your life.   Every trainer that I know of, including those in this region like Adam Khoo, Daniel Loh, Leong Wei Ping, Conrad, etc. also recommends this platform to their students.   You cannot go wrong investing some time to learn this powerful platform once, and reap the benefits for the rest of your life.  :-)

Free Singapore Demo Account to start practice immediately
To open a Free Demo Account immediately, you can follow the instructions given by Adam to all WAI members here (click on the hyperlink).  Please say thanks to WAI member "ST Loke" who kindly supplied us with this document.   Loke has generously volunteered to help new members if they have problems on how to open this Demo Account, as well as many other members in WAI Penang Telegram group.  Please don't hesitate to contact Loke or any members directly, or to shout in Telegram if you have problems.

The advantage of opening the Singapore Demo Account is that apparently, no lengthy approvals is required - just fill the online form, and after some validation, you're free to start immediately!

Tip by another member:  No need to enter your real Singapore address to open the Demo Account.   Any valid Singapore address will do.

Real Life Monies require US Account
When you are ready to trade real life monies, you will need to open a US account (instead of the Singapore branch Demo Account).

In effect, you open an account with TD Ameritrade, one of the world's top online brokerage company.   TD Ameritrade is the company that owns the TOS software that you've been using.

To open the US Real Life Account and to fund the account in US$, please click here to follow the instructions.   This file is kindly supplied by another generous member who shall remain anonymous.   If you have any questions, please do not hesitate to shout in Telegram, as there will be many members who will be glad to help you.

How to use TOS
Because TOS is very powerful and is used by many professional and full-time traders, you will need to invest some time to learn the basics.  There are many traders who just learnt the basics, and ignores everything else that TOS has to offer, and that is okay too.   We don't all need to have PhD degrees to learn how to make money in the US stock market.  It is okay to just start with learning 1%, and make $$$, and when we are comfortable and ready, to move on to learn the next 1% and so on.

To learn more on how to use the TOS software, please click here to see the guide.   This file is kindly supplied by another very generous member who shall also remain anonymous.  Treat this as just a "Reference Guide", since it can do much more than you will ever need.   If you have any questions regarding how to use the TOS software, please do not hesitate to shout in Telegram, as there will be many members who will be glad to help you.

One Key Step to do - Open the TOS Account
If you are a complete novice to US stocks, and don't want to risk real $$$ yet because you have never traded stocks before (or not yet built sufficient funds), then, there is 1 Key Step for you to do NOW (if you haven't done it yet).

This 1 step is a MUST DO, because if you don't take this step now, you can never progress in your own development as a Trader.  

This 1 step is to simply open a Demo Account.  It's Free, and it allows you to learn the system, to experiment and "play with" an account that "looks and feels" almost similar to the real life account (perhaps slight delay in quotes if you haven't funded it yet), so that by the time you are ready to fund a real life account, your transition from Demo to Live is smooth and seamless.

So, go ahead and open the TOS Account (Demo or real life).  Yes, it will take a few mini-steps to open a Demo Account, but it will be minutes of your life that is worth spending.

So, start making new friends in WAIIC Penang via the monthly meetings and/or the daily Telegram chats, don't be shy to reach out for help if you need one. 

If you find it too difficult to follow the online guide, then, reach out to the Telegram Group in advance, and ask if you could bring your own laptop with Internet connection for help to install.  Join a team, and seek out your WAIIC Team Leader for help.  S/he should be able to connect you with someone in the Club, if s/he is unable to assist you.   If you manage to have someone in Telegram/SMS/Private chat to agree to help you in advance, you have just taken one small but very important step towards your lifetime Financial Goals.

Good luck!

PS.  One More Tip:   You can never destroy a Demo Account and you can never go broke trading a Demo Account.  This is the great thing about Demo Account.   You can simply "hentam" and you will never break or lose real monies.   It is an excellent platform to learn everything you ever wanted to try with a US stock account AND not lose any monies.   Go ahead and try to double or triple your money, and if you go bust, so, be it.  Just reset your balance back to $10,000 or any other amount you want and start the game again.  It's like playing an online game!

The Power of Simplicity: Selling Credit Spreads on Indices

Previously, I shared one of my trading inspiration, Karen the Supertrader here. 

I can only recommend you to watch and study the video:
- if you traded Options and still not get a consistent trading results, or
- if you don't trade Options yet, and desires a more consistent trading results, or
- if you simply desires a more consistent trading results with a high win rate,
and then, take it from there to further enhance your learnings and your trading journey.

Daniel Loh Passive Income Mastery (PIM) Programme

That's Daniel Loh on the left :-)  We were Batch #70 (!) with over 80 attendees (including those who re-sit).  A few of us who read my blog prior were pleasantly surprised that Daniel also used the same Karen the Supertrader video as our inspiration in the PIM programme!   We watched video #2 together! 

Daniel then summarized the key points, with discussions surrounding Karen's trading approach in more detail. 

A good alternative to getting more consistent result than trading stocks

PIM graduates were invited to join Daniel's Closed FB website, which has now grown to 1,438 members, with 69 new members from Batch #70.

In the course, he shared the video testimonies of a few of his graduates that demonstrated high and consistent returns.   As his students traded Options on Futures with even higher leverage, coupled with much smaller account size, their returns even exceeded those of Karen the Supertrader.   One has gone on to manage a hedge fund, another is doing charitable work to invest the insurance proceeds of one of his friends who has died prematurely, leaving behind a very young daughter so that she will have better future in life later.  Another was able to retire early and able to invest his own funds, and he is very conservative targeting "only" 3% per month returns.  In addition to Karen, Daniel's students also provided quite an inspiring story. 

My own experience

My own personal experience with credit spreads are similar, although less spectacular as until PIM, I was not trading options on Futures, but the past 1.5 months only on indices, ETFs and a handful of individual stocks. 

E.g. from my previous article, the monthly returns are approximately:
- SPX:  $3k / $48k > 6%.
- RUT: > $1.4k / $20k = 7%.
These 2 instruments only utilized $68k capital.

In short, if you use just 50% of your trading capital to trade SPX and RUT, then, it is very realistic to earn 3% to 4% per month, just consistently trading these 2 instruments.  If you know when to enter (not every day, but patiently waiting for the right setups, just like stock trading), how to exit (Risk Management, just like stock trading), how to Position Size (Money Management, very similar to stock trading), have the right attitudes, mindset and beliefs (Psychology, similar to stock trading), it is very possible to earn 36% to 48% per year.

If you have an excellent foundation in consistently trading SPX and RUT profitably, over time, I expect you should have little problems transitioning to even higher leveraged products such as the /ES and other Futures products, which you can then expect to double the above returns over the longer term.  However, if your trading basics are not on a solid foundation (e.g. if you simply and regularly violate what Adam teaches in the WAI course for stocks), then, the higher leverage from Options and Futures will most likely cause you to go bust faster.

Karen the Supertrader Video #2 - the power of simplicity - selling Credits in SPX, RUT and NDX

I can only urge you to watch and summarize for yourself Video #2, as this is the start of my journey to selling Credit Spreads.  It doesn't mean the video provides a complete course, far from it.  However, it provided me with the basics and sound technical tips, which I am then able to compare and integrate parts that I learnt from Leong Wei Ping in his special Credit Spread course, coupled together with many other parts that I learnt from many others over the Internet, including Van Tharp.  And after having attended Daniel Loh's PIM course, I am gradually incorporating Futures.   But if you are starting, learn the baby steps first with a solid foundation. 

Do you really understand investing results?

Quick Questions

1. What is the largest ETF in the world?
2. How long has this ETF been in existence?
3. Do you know where you can get free price data for this ETF for your own analysis?
4. In the WAI workbook on pages 36 to 74, Section 2 of the workbook is about "Investing in Exchange Traded Funds".  Have you tried to perform an independent analysis of the results presented there to get an independent view of what's being presented?
5. How much does markets really go up over the "long term"?  How "long" is this long term?
6. How much does market "fall" over the "short term"?
7. If the average monthly return from staying invested is x%, how large is x%?
8. How much can actual monthly returns vary from x%?
9. If there are 10 different investors starting to invest at different times, what % of investors whose actual returns will approach x%?
10. If you are thinking of becoming an investor, would you still stick to the long term investing plan if your actual returns is negative after 3, 6 or 12 months?

Introducing SPY
SPY is the S&P500 Exchange Traded Fund (ETF) managed by State Street Global Advisors.  It is the largest ETF in the world - the latest Assets Under Management (AUM) is around US$177 billion.  It is clearly the most popular ETF in the world, as measured by the average daily trading volume.  The fund seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index, by holding common stocks belonging to the S&P500 index with similar weights.  Free sites like Yahoo! Finance provides decent introduction to SPY per below:

Only 22 Years Old
Interestingly, the first prices available is from Jan month-end, 1993, when the ETF first started.  I studied many subjects in university including Finance, but it wasn't taught then as I graduated in 1990.  From my perspective, ETF is a relatively recent phenomena.

You can get free historical price data from the Yahoo! Finance website, under the "Historical Prices" tab.  To be an independent investor and trader, I strongly recommend you to use this feature to perform you own analysis of stock prices.  It will give you a lot more "colour" to what Adam teaches in the WAI course, as well as what anyone taught or said about stocks and finance.

0.83% Average Monthly Returns
Between Jan 1993 to May 2015, there are 269 month-end prices with 268 monthly returns.   268 months is equal to 22 years and 4 months.  The average of the 268 monthly returns is approximately 0.83% per month.   So, if you are able to buy the ETF using a single lump sum 22 years 4 month ago and hold it till today, then, you can expect to earn 0.83% per month throughout that 22 years 4 month period.   This looks small, but isn't shabby since 0.83% monthly returns is approximately 10% returns per year.  It sure beats F.D. rates by a long mile.

Buy & Hold is extremely unpopular
In practice, there are extremely few people who is able to buy and own SPY for 22 years.  Speaking for myself, I have known hundreds (or over a thousand) of investors and traders over my lifetime (real life, and over the Internet), however, I am sad to say that I still don't know any single person in my entire life that had owned SPY for 22 years!  I do know a handful of people who owned stocks like Public Bank for over 4 decades, but these people are very few and a rarity.  I find this to be the biggest gap between "theory" and "practice".

Volatility is not what you think
With an average monthly returns of 0.83%, how much volatility are you willing to tolerate?  For example, are you willing to suffer a temporary period of zero gains to earn 0.83% long term?  Do you have the stomach to suffer a temporary loss of 0.83% (instead of a gain of 0.83%)?

There are many research in Behavioural Finance surrounding this topic.  One of which is called "Loss Aversion" / "Prospect Theory", which basically describes people's tendency to strongly prefer avoiding losses to acquiring gains. (For more information, see here, here and here).  Most studies suggest that losses are twice as powerful, psychologically, as gains.  There are many implications, one of which is that the "average person" typically doesn't want to lose more than 0.42% per month, to seek an average gain of 0.83% per month. 

Does this describe you?

If so, I have bad news for you.  You are psychologically not yet ready to become a long term investor in SPY (or a long term investor in any stocks).  It doesn't mean you can't become one, it means you will need to change your mindset and beliefs (including the ones you are not conscious of) about stock market investing to be a successful long term investor, and how successful you are (to change your deeply held conscious and unconscious beliefs) depends on you. 

Beliefs can be improved with time and "experience"
In my personal observation, too many new investors (whether young or old) approach investing with little knowledge, little experience, little hard data, and a lot (or a little) of preconceived ideas based on what they've gathered during their lifetime.  Most of the preconceived ideas tend to be popularized by the mass media, friends, family who are also influenced by similar medium.  There are very few independent investors and traders willing to do their own concrete research.  It is understandable, because this takes work and effort.

Independent back-testing can help develop and speed up "experience" considerably
If you wish to gain financial independence as an investor or a trader, I cannot emphasize strongly enough how important it is to be independent, and to be able to do your own research including"back-testing".  "Back-testing" refers to the act of analysing the past to learn how a particular investing/trading.  Here, it would typically involve downloading the 22 years of historical SPY prices and do your own analysis of what you can expect every month, over the past 22 years, if you had bought and hold SPY.   As you walk through the experience month by month, over the 22 years, you will have reaped much of the benefits of 22 years of investing experience perhaps in just 1 afternoon of analysis.   I have personally found this sort of exercise to be much more insightful, than sitting passively in a class listening to what others have to say about this topic, because one is "active" and "experiential", whereas the other is "passive".

4.20% Standard Deviation of Monthly Returns
The standard deviation of the 268 monthly returns (which you can calculate using Excel very easily) is 4.20%.   What does this mean when the Average Monthly return is 0.83%?

Actual Returns is very rarely Average
In fact, less than 10% of the time actual returns falls within 50% of Average to 150% of Average.
What this means is that if the Average Monthly Returns = 0.83%, 50% = 0.42% and 150% = 1.25%.
In other words, it is VERY RARE for actual monthly returns to fall within 0.42% and 1.25%!

How rare?

Over the past 268 months, the number of times this has actually happened is only 25 out of 268 times.  

Vast Majority of the Time, Actual Returns are much higher or much lower than Average
In other words, the vast majority of the time, actual returns exceeded this range (0.42% to 1.25%)!   If you are a betting man, you would win 9 out of 10 times by betting that the actual monthly returns will "significantly differ" than the long term average, outside 50%-150% of Average Monthly Returns! 

Long Term Investing Edge is Very Small on a Monthly Basis
4.20% standard deviation (SD) means we can roughly expect two-thirds of the time, the actual returns to fall within +/- 1 SD from the mean.  

Mean - 1SD = 0.83% - 4.20% = minus 3.37%.
Mean + 1SD = 0.83% + 4.20% = +5.04%.

This means, around 2/3rds of the time, we can expect actual returns to fluctuate between -3.37% to +5.04%.

This is a huge gap in monthly returns, around 8.4% gap in one month!  In contrast, 0.83% looks extremely small in comparison! 

To earn 0.83% per month, you must have the stomach to tolerate volatility of at least 10 times or more, or tolerate a gap of 8.4% per month.

Think about this for a moment.

What does Behavioural Finance say about Loss Aversion?  Most people cannot tolerate a loss of just 50% of expected returns.  Yet, the stock market reality is that 90% of the time, actual returns will exceed 50% range of expected returns.  Do you now have some insight as to why investing (buy and hold) is so difficult for the vast majority of people who does not have the necessary "experience"?

Actual Return Distribution
Below is the actual distribution of monthly returns, by 10 groups.

Note that each group differs by the next one by 50% of Average Monthly returns, or approximately 0.415%.
Group 5 is 50%-100% of the Average Monthly Returns, between 0.42%-0.83%.
Group 6 = 100% to 150% of Average Monthly Returns, between 0.83%-1.25%.
Without looking at the graph below, how frequent do you expect returns to fall in Group 1 and Group 10, i.e. for the actual monthly returns to be far away from "average"?

Volatility is not what you expect

Most investors are floored when they see the above chart for the first time.
When average monthly returns is 0.83% over 22 years and 4 months, they don't expect that the vast majority of the time, actual monthly returns will be either bigger than 2.5% or less than negative 0.83%.   (the 2 peaks for Group 1 and Group 10).

In fact, it is extremely rare for Actual Returns to be "near" Average returns from the often quoted studies popularized by the media, investment books, investing courses, etc..

This is not a criticism of the WAI workbook, in fact, I think it gives very good basics, but it is highly doubtful that any trading or investing course will show you this specific graph. 

The reality of investing is that volatility is not what you think nor what you expect, unless you have done your own independent "back-testing", or have 22 years and 4 months of actual SPY investing.

(Advanced note:  if you are an Options trader, notice how the distribution of actual monthly returns is NOT "normally distributed", but have extreme "fat tails" and is "skewed").  

Actual Monthly Returns over 268 months

Notice how rare the actual monthly return is to the 0.83% Monthly Average.
On the downside, notice the 2 big spike down, the first minus 14% and the second minus 17%.  Both far bigger than the 0.83% monthly average.   On the upside, notice the one time when it spiked up higher than 10%, to be closer to +11%.   All these are returns over 1 month.
Returns from the stock market is definitely NOT flat-line.

(Advanced note:  If you think TA or FA can predict future returns all the time like the above, you might want to retest your ability from back-testing a lot more charts or stocks picked randomly.  The best analysis tend to be successful when the sample size is heavily filtered and not all cases like above.  In addition, they may provide only a small edge and not a very large one when filtered). 

Implications to Buy and Hold Investor wannabes
One can learn a lot from Warren Buffett here, who totally understand the above stock market reality.  

1. If you want to be a true investor, you need to be able to ignore the daily and monthly fluctuations.  
This is not surprising because as you can see from the hard data above, the fluctuations are wild, and serves no useful purpose for a Buy and Hold investor (except during extreme times, for him to take advantage of).

2. You must stay focus on the long term.
Long term is often measured in a decade or longer.  Often, your monthly results will not resemble anything remotely close to what you can expect over the long term.   This is why long term investing is so difficult to vast majority of people who mistakenly expects their monthly returns to be "close" to the long term average.   They tend to give up too soon when they experience normal and expected setbacks.

3. You must embrace large deviations from the long term average.
You must not be too euphoric when you are up 200% higher than long term average.
You must not be too depressed when you are 200% lower than long term average.
You simply do what Warren Buffett does, which is to tune out the noise.
As far as you are concerned, even if the stock market closes for 5 years, you are not bothered, but just stick to your investment plan, including your regular deposits, and your regular annual/semi-annual rebalancing, or any other strategic actions that you need to take as an investor consistent to your sound Investing Plan.

4. If you don't own a portfolio of 500 top companies, expect your volatility to be even larger.
Remember that this result is for SPY, and assumes you own a highly diversified portfolio of 500 of the Top companies in the U.S. with typically global operations.   Anything less diversified, or less than the top stocks will more likely have much larger volatility.

5. The same type of investor investing in the same instrument starting at different months will experience substantially different results.

Consider the following investors who starts at different months:

5a. Start in Jan 1994:  Subsequent monthly returns = 3.49%, -2.92%, -4.19% ... already negative after the first 3 months, and nothing remotely close to 0.83% per month.

5b. Start in Jan 1995:  Monthly returns = 3.36%, 4.08%, 2.78%, 2.96%, 3.97%, 2.02%, 3.22% for the first 7 months.   This investor must be euphoric, because for 7 months in a row, he earned much higher than 0.83% per month average.  He must think he has superior market timing or superior investing ability.

5c. Start in Apr 1998:   Monthly returns = 1.28%, -2.08%, +4.26%, -1.35% and get this, -14.12%!!  If this Buy and Hold investor does not have the right psychology, a single panic is likely to undo all his past investing.

You get the idea.   These 3 investors can do the same analysis, invest in the same instrument called SPY, invest the same $ amount, but if they start at different times, they will get very, very different results.  

In fact, it is safe to say that even though the "average" monthly returns = 0.83%, practically nobody gets this "average" returns.   The volatility in the stock market is so high that odds are 90% of investors out there will get a substantially different result than "average".

Conclusion
I think there is so much information above, that different people can take away different conclusions.

For me, my take-aways from doing this independent study is as follows:

1. Buy and Hold investing in SPY does provide a small edge (+0.83% monthly returns) which can add up over the very long term.

2. However, it is not easy to do, due to its very high volatility, and vast majority of the time, the actual investor result will be substantially different than the historical long term average, depending on the start date.

3. They will only approach the long term average if they are patient enough to own SPY for decades.  Their performance cannot be measured in months or even years.

4. Investing in SPY implicitly requires long term faith in the US stock market over the next few decades.  If they do not have faith in the US economy long term, they will not be able to successfully invests in the US stock market successfully long term.

5. Discipline is paramount - just one small act of weakness during panic can undo many years of investing.  The investor is often better off ignoring the daily and monthly noise, even the quarterly noises.  This can be extremely hard to do for most people with significant sums of monies invested in the stock market.

6. Never blindly trust anyone when it comes to the stock market.  Do your own independent research.  Listen, but validate for yourself.

7. If you lack the necessary experience, you can speed up your own growth and development by doing your own independent back-testing, to gather the necessary month-by-month or day-by-day experience over very long investing/trading periods in a short afternoon or weekend.

8. There's always a lot more things to learn from the stock market than you think.  You don't know what you don't know, and this is more a personal note to me than anything else.